ECO SURVEY – Competitive Federalism to Competitive Sub-Federalism

ECONOMIC SURVEY 2017

ECONOMIC SURVEY 2017 talks of taking the federalism to the next level i.e. to the cities. Empowered Cities & Urban Local Bodies will hold the key to India’s growth in the future as more of India get Urbanised. With these words, lets move to the quote with which this chapter begins with in survey:

All through organized history, if you wanted prosperity you had to have cities. Cities are places that attract new people with new ideas.

– Jane Jacobs, author of “Cities and the Wealth of Nations”

INTRODUCTORY NOTE

New analysis of recent data for 21 Indian cities suggests a strong correlation between the capacities–resource and people–of urban local bodies (ULBs) and their service delivery. ULBs could clearly raise more resources. Cities, like states, must compete with each other to unleash dynamism. To competitive federalism India must add competitive sub-federalism.

URBANISATION ON RISE IN INDIA

For India, urbanisation is rapidly on the rise.

1991- One-Quarter of the population living in cities.

2011- One-Third of the population living in cities. Cities produce more than 60% of India’s GDP.

MIGRATION CHALLENGE

The exodus of rural Indians into the cities over the coming decades will pose tremendous challenges for government, particularly the municipalities. Hence, critical role for ULBs.

KEY FINDINGS W.R.T URBANISATION IN INDIA

Contrary to perception, India’s urbanisation rate appears to have been similar to that in other countries.

It can be seen that countries have followed a pattern of urbanisation where the level of urbanisation has increased with the per capita GDP. Therefore a large part of the difference in the levels of urbanisation seen between India and China can be mainly attributed to the different levels of development of each country. Contrary to perception, India and China have had very similar trends of urbanisation.

Greater service delivery (ULBs) is correlated with more:

Staffing

Capital expenditure per capita

Resources

Own revenue

A clear conclusion is that more resources seem to be associated with better outcomes

One striking correlation (or its absence) is between formal taxation powers and actual mobilisation of resources. This is because having the powers to impose a greater number of taxes do not necessarily mean greater revenues for an ULB. Many other factors are important for being able to collect greater revenues such as the size of the tax base, the efficiency in tax collection and the level of economic activity in the city area.

THE ZIPF’S LAW

India’s pattern of Urbanisation does not adhere to Zipf’s Law.

The law claims that the city with the largest population in any country is generally twice as large as the next-biggest; three times the size of the third biggest, and so on.

This implies that many of the smaller cities are unusually small and so are the bigger ones.

There are many reasons why the large cities are unusually small. One explanation might be that their infrastructure is overburdened. Another is that India is landscarce relative to most countries, discouraging migration. Further mobility in India is limited by strong placebased preferences embedded in deep social networks in India.

THE FINANCIAL CHALLENGE

Addressing this infrastructure deficit will require resources, some of which could come from the Centre and the states.

74th amendment leaves it to the discretion of state legislatures to devolve finances so that ULBs can fulfil these functions.

While property tax is the most important constituent of own revenues, there are problems of low coverage, low rates, low collection efficiency, flawed methods for property valuation, loss on account of exemptions, and poor enforcement.

ULBs by and large have not been able to levy adequate user charges to cover even the operation and maintenance costs.

Issuing municipal bonds has been challenging owing to the poor state of ULB finances and governance.

Property Tax of ULBs as a Percentage of Own Revenue

Conclusion

The first task is empowering ULBs financially. The states should, therefore, empower cities to levy all feasible taxes.

There is a need to adopt the latest satellite based techniques to map urban properties.

MoUD should give greater priority to compile and publish comprehensive data on ULBs and urban sector.

Cities that are entrusted with responsibilities, empowered with resources, and encumbered by accountability can become effective vehicles for competitive federalism and, indeed, competitive subfederalism to be unleashed.

To check out MCQs based on Economic Survey 2017, use the following Links: